EU analysts warn euro summit deal joy short-lived

AFP: As markets cheered a late-night eurozone deal hailed as a pleasant surprise, analysts were already sounding a more sober tone in the cold light of day Friday, warning euphoria could prove short-lived. After tense and seemingly never-ending talks, eurozone leaders clinched a dawn deal they hoped would reduce the high borrowing costs suffered by Italy and Spain, as well as boost the banking sector and inject billions into Europe's economy. EU president Herman Van Rompuy hailed the accord, reached after unusually feisty exchanges and a veto threat by Madrid and Rome, as a "real breakthrough" and for the moment, markets seemed to believe him. Asian stock markets staged a spectacular turnaround and the euro experienced its sharpest bounce in months as traders reacted with joy to a solution that leaders said tackled the short-term crisis as well as long-term euro weaknesses. Europe's markets also shot up amid hopes that leaders were showing more flexibility in tackling the two-year crisis. But analysts were more cautious when they looked at the detail of the agreement, with many now looking to the European Central Bank to plough in more funds to the economy at its meeting on Thursday or maybe even before. Christoph Weil, an economist at Commerzbank, was concerned that the EU's new bailout mechanism (ESM), which leaders agreed could recapitalise banks directly and buy up bonds of ailing nations, could soon run short of funds. "The Spanish government is seeking up to 100 billion euros for its ailing banks, and Cyprus has also now asked for help. More SOS calls could follow soon," he said. "A long queue could soon form for the rescue fund," he said, adding that final demands on the bailout pot could amount to double its firepower. At Moneycorp, analysts said: "The usual pattern for these things is euphoria followed by analysis leading to realism with an undertone of disappointment." Several economists drew parallels with the European football championship semi-final, held during the summit, in which Italy beat the highly fancied Germans 2-1 to face World Champions Spain in the final. "Having just kicked Germany (the paymaster) and Portugal (the fastest reformer) out of the Euro 2012, Italy and Spain also scored some nice points at the EU summit last night," said Holger Schmieding, analyst at Berenberg Bank. "But the referee to decide whether or not the goals will count is the European Central Bank," added the analyst. Many said that Italian Prime Minister Mario Monti had scored a victory over German Chancellor Angela Merkel, who had been wary of allowing the ESM to recapitalise banks directly. Carsten Brzeski, from ING Bank in Belgium, said: "At first glance, last night's decision could look like the second Italian victory over Germany within less than 12 hours. "At second glance, however, it is rather a draw, bringing the game on the euro crisis into extra time," he added. ECB President Mario Draghi left the meeting on Friday afternoon to brief reporters, saying the bank considered the bank recapitalisation deal a "good result." Observers are hoping for the ECB to cut interest rates at its Governing Council meeting on Thursday and maybe launch a third round of cheap liquidity for banks after two injections worth more than a trillion euros. "Over to you, Mr. Draghi," said Berenberg's Schmieding.